U.K. homeowners brace for mortgage rate shock

Millions of homeowners in the U.K. could see their mortgage rates skyrocket to 6% over the next year or so — from as low as 2% — a massive hit to monthly budgets at a time of soaring inflation.

Why it matters: The coming "rate shock" is a prime example of how homeowners in the U.K. feel the pain of central bank rate hikes faster than in the U.S., where the Federal Reserve's similarly steep increases generally only impact those making a new purchase.

• Mortgages in the U.K. typically have fixed terms of only two or five years. After the fixed rate expires, mortgage holders pay either the "standard variable rate," or they can refinance into a new fixed rate loan.
• The set-up was a boon for a long time when rates were falling. Now they're rising fast.

On the flip side: Most American homeowners have 30-year mortgages with very low rates secured during the past two years. They don't need to deal with the pain of higher rates (now topping 7% per Mortgage News Daily) unless they need to move.

• "Golden handcuffs," as the WSJ recently put it.

Worth noting: Rates are moving up so fast, that some U.K. banks have temporarily stopped offering mortgages over all the uncertainty.

By the numbers: About 600,000 fixed-rate mortgages are scheduled for refinancing by the end of 2022, followed by 1.8 million in 2023, UK Finance, an industry trade association, tells Axios.

• And there are around 1.7 million mortgage holders with floating rate loans who are already feeling the pain of rising rates, according to an estimate in the FT.
• Someone currently paying £863 a month could wind up paying £1,490, according to a note from Pantheon Macroeconomics.

What's next: Pantheon predicts a sharp rise in mortgage defaults in the U.K. — and that home prices will plummet.